LifeLine Service

While I don't necessarily agree on all aspects of the Minority Media & Telecommunications Council's positions on the FCC's Universal Service subsidy programs, I do agree on the importance of a robust LifeLine program to help ensure that low-income persons have access to communications services, including broadband. So, I wanted to call your attention to this piece from MMTC's Kenneth Mallory. With the economy still in the dumps, the a well-functioning LifeLine program is especially important to ensure that low-income persons, including minorities, stay connected.

ICC Reform: Another Subsidy System that Needs a Sunset

Anticipation is building for the FCC's upcoming public meeting on Thursday, October 26. The Commission is expected to finally vote on an order to comprehensively reform the universal service fund (USF) and intercarrier compensation (ICC) system. In a blog post from earlier this week, FSF President Randolph May restated the case for including a sunset date for all USF high-cost subsidies in the FCC's reforms. The outdated ICC system, for its part, deserves a sunset as well.

When FCC Chairman Julius Genachowski announced some of the basic components of the Commission's forthcoming reforms on October 6, he specifically mentioned three main elements for ICC reforms. One element is to phase down access charges over a multi-year period, "starting by bringing intrastate access rates to parity with interstate rates." This is a commendable reform proposal that, among other things, will help reduce direct transaction costs and reduce incentives for ICC-induced arbitrage. Establishing a low, uniform access charge rate would also establish a path to eventually sunset the ICC access charge regime.

In short, ICC is a system of payments between carriers to compensate each other for the origination, transport and termination of voice traffic. Professor Gerald W. Brock, a member of the Free State Foundation's Board of Academic Advisors, summarized the origins of the ICC/access charge regime in his September 6 FSF Perspectives paper "Abolish Access Charges Now":

Access charges were first implemented in 1984, and they were designed to maintain a portion of the pre-divestiture subsidy from long distance to local service for a temporary period while the industry adjusted to early competition. Access charges were created through a rigid cost allocation system for companies subject to rate of return regulation with an expected industry structure of competitive long distance companies and monopoly local exchange companies. Price discrimination was a fundamental feature of access charges from the beginning and the system has generated a long series of disputes and innovative ways to arbitrage between higher and lower rates for essentially the same service.

This system is supplemented by a system of differing and often high intrastate access charges over which state regulators have oversight. Another component of the ICC system is the subscriber line charge (SLC) that is assessed against consumers in their monthly phone bills.

But the nearly 30 year-old ICC system makes little sense in relation to today's advanced telecommunications market. American consumers no longer exclusively on the public switched telephone network (PSTN) to obtain plain old telephone service (POTS). Instead, consumers are increasingly subscribing to bundled services offering voice, text messaging, instant messaging, video, broadband Internet, and other data services—many of which are now delivered over IP-based networks.

One of those services is VoIP, typically offered by cable providers and over-the-top providers like Skype and Vonage. VoIP and other IP-enabled services are eroding the distinctions between local- and long-distance services and between intrastate and interstate telecommunications. The latter distinction historically relied on the ability to identify the two end points of every call. Yet as the FCC recognized in its Vonage Order (2004): "the inherent capability of IP-based services to enable subscribers to utilize multiple service features that access different websites or IP addresses during the same communication session and to perform different types of communications simultaneously, none of which the provider has a means to separately track or record."

Wireless services are flourishing when compared to wireline and have broken down the local/long-distance distinction, similarly making it more difficult to tell where a call starts and ends. And as Professor Brock pointed out, the FCC's rulings in the 1990s establishing wireless-wireline connection based on reciprocal compensation and prohibiting wireless carriers from filing access tariffs "made it feasible for cellular carriers to eliminate the earlier sharp distinction between rates charged for local and for long distance calls and to begin the now standard practice of distance insensitive rates for calls that begin on a wireless telephone."

Imposing interstate and intrastate access charges varying by technology or provider makes little sense in an increasingly data-centric, IP-based and wireless world. Calculating compensation payments according to the ICC system's per-minute rate structure – and based on whether the call is interstate or intrastate as well as on the type of technology used – create significant compliance costs.

Not surprisingly, the access charge regime is becoming an increasingly strained and poorly suited coping mechanism when it comes to dealing with the technological changes of the past 30 years. The growth of wireless and IP-enabled services such as VoIP has led to the steady decline in minutes of use (MOUs) for which local exchange carriers are to be compensated. This decline in MOUs has serious consequences because rate-of-return carriers' interstate access rates are designed to give such carriers opportunity to earn an 11.25% rate-of-return. Declining MOUs mean increasing access rates to offset demand reductions and help ensure their guaranteed rate-of-return.

Data cited in the Universal Service Monitoring Report (2010) show the steady but significant drop in MOUs over the last several years, with ILECs seeing the overall number of interstate access minutes declining every year since 2000. Those declines are roughly on the order of ten percent annually. Interstate access minutes for ILECs dropped from near 576 billion in 2000 down to approximately 401 billion in 2005, and down further to about 277 billion in 2009.

As the FCC's NPRM for comprehensive USF/ICC reform points out, "rate-of-return carriers' interstate switched access rates increased 9.4 percent in 2010, which follows similar increases during the last few years." High access rates have also inadvertently created incentives for arbitrage schemes such as phantom traffic and traffic pumping. The FCC is finally proposing to specifically address those abuses in its forthcoming reform order. A low, uniform access charge rate would also reduce arbitrage incentives.

Adoption of a low, uniform access charge rate amounts to a much more modest reform than the immediate abolition of all access charges that Professor Brock admirably urges. But streamlining and simplifying the ICC system could help reduce the misalignment between that system and today's technological realities. Meanwhile, the Chairman's reform proposal includes implementing a recovery mechanism to better ease carriers' transition away from ICC subsidies. And to the extent states find that local conditions require any further subsidies, they should address those concerns by enacting or reforming state USFs.

Reducing and bringing intrastate access charge rates into parity with interstate access charges could also help put us in a position to consider the next step: eventual sunset of the ICC regime. The ultimate end game should be an unregulated, free market in IP-based traffic exchange, similar to what prevails today with the Internet. The closer we can get to such a system and sooner we can get there the better.

NYT's Rash Call for Wireless Over-Regulation

If you want an upside-down view of wireless competition, look no further than the New York Times' October 25 editorial. In the space of one short editorial, the NYT board manages to dismiss the dramatic innovation and choices that consumers now enjoy in the wireless market, call for bill shock regulation, demand extra regulatory conditions on future spectrum auctions, and even urge imposition of a Title II common carrier regime over wireless. Scott Cleland picks the editorial apart in a blog post titled "NYT's Uninformed War on Competition Policy."

House Judiciary Committee Passes REINS Act

Yesterday the House Judiciary Committee passed the Regulations from the Executive in Need of Scrutiny Act ("REINS Act").   Specifically, the bill authorizes Congress to vote on regulations that will have an economic impact of at least $100 million or major increases in costs or prices for consumers. The bill passed along party lines by a vote of 22-14.


There are a number of efforts percolating in Congress now that are intended to subject federal rulemaking to more arduous requirements. While there are legitimate questions to be resolved about each, together they indicate a growing consensus that Congress ought to exert greater control over the promulgations of excessive agency regulations.

USF Reform: Peering into the Sunset

When the ABC plan to reform the Universal Service regime was submitted to the FCC in late July by six telephone companies I wrote here and elsewhere that the plan represented "a major step forward in the effort to achieve a more efficient, technology-neutral, economically-sound universal service system." I still believe this to be true.

And I have said here and elsewhere that the ABC plan could be improved further by adopting some of the suggestions put forward by cable operators, such as modifying the "right of first refusal" component of the plan to transition more quickly to award all subsidies through a competitive bidding process.

No doubt the wireless and satellite companies have offered suggestions worthy of consideration as well.

With the FCC fast approaching a decision, even the most cursory review of the hundreds of "ex partes" filed in just the last few weeks demonstrates the intensity of the lobbying effort by all the various communications providers. This is not unexpected. Nor is it in any way a moral failing. With the FCC considering how to allocate high-cost subsidies amounting to $4.5 billion per year, it would be surprising if the various subsidy recipients, and potential recipients, didn't go "all out" to get as much subsidy funds as possible.

It is in the nature of government entitlements that recipients and potential recipients will not easily relinquish their "rights" to an entitlement without a real fight. Why would they?

This is why, along with a no-loopholes "hard cap" for the high-cost fund at $4.5 billion per year and a prohibition against subsidy payments to providers in areas already served, I have advocated a "sunset" date, say ten years, for whatever program the Commission adopts.  Along with my FSF colleague, Seth Cooper, I filed comments with the Commission last May stating:

Announcing a sunset date for ending high-cost subsidies will signal the Commission's seriousness of purpose in transitioning the USF and ICC systems to greater reliance on market forces. And such an announcement will crystallize the expectations of high-cost area providers, particularly those subject to guaranteed rate-of-return regulation: they should not rely on such subsidies in perpetuity. A reasonable sunset date will allow them time to make adjustments as needed to transition operations to a more market-oriented approach to providing services.

Since then, I have often urged, for example, including recently in this piece, the adoption of a sliding reduction of high-cost subsidies until the sunset date is reached.

It is not necessary to question the present need for subsidies for broadband build-outs to unserved areas to also recognize it makes sense to put a sunset date on the new regime. There has been too little attention paid, especially by self-declared consumer advocates, to the overall adverse impact on consumers resulting from the current 15% tax added on top of the regular charges for all interstate and international calls. Along with many other authorities, these FCC comments submitted by the Mercatus Center reference the empirical research that documents the welfare losses to consumers and producers attributable to USF surcharges.     

Of course, if money grew on trees, there for the picking, all of this would be merely academic. But it doesn't, not in Greece, and not even here in America.

Apart from what ought to be a general disinclination to establish expensive new entitlement programs that, by design, are never-ending, in this instance such an approach is especially foolhardy. The communications and information services marketplace environment is simply too dynamic and fast-changing to foresee what subsidies, if any, may be appropriate in ten years, and what form they should take.

A sunset in ten years, after a programmed phase-out, doesn't necessarily mean that high-cost subsidies could not be continued in some limited fashion after a thorough review of any demonstrated continuing needs. But it would mean that such subsidies would not just be continued willy-nilly absent such a thorough review.

TWC Research Program - Deadline Approaches

Last January I put in a plug here for Time Warner Cable's research program on digital communications, and now it is timely for another plug for this worthwhile program. The program provides stipends for research dedicated to increasing understanding of the benefits and challenges facing the future of digital technologies in the home, office, classroom and community.

The deadline for new applications is November 1. All the details about the program and the application process may be found here. Time Warner Cable's program already has produced some very good scholarly work that helps us understand key issues surrounding the use of digital technologies. With continued participation by a wide range of qualified applicants, there is every reason to look forward to the publication of more useful research in the future.

So, take note of the calendar!     

4G Wireless Future Requires Rapid Action to Make More Spectrum Available

On October 17, NTIA issued its Second Interim Progress Report on the Ten-Year Plan and Timetable. NTIA is coordinating an interagency effort to meet the President's goal of making 500 MHz of spectrum available for commercial use by 2020. This effort includes the goal of making 115 MHZ available by 2015 through a fast track evaluation of certain priority spectrum bands.

More spectrum needs to be repurposed and auctioned by the FCC for commercial use to accommodate the continuing increase of mobile wireless and mobile broadband usage. With the ongoing roll-out of 4G wireless networks, data-rich mobile wireless traffic will continue to skyrocket. Prior history regarding FCC spectrum auctions suggests an inevitably lengthy turnaround in identifying spectrum preparing it for auction. Not to mention the additional time it takes for prospective auction-winning wireless carriers to construct and calibrate their networks for commercial wireless service. This means that time is not a luxury that Congress, NTIA, or the FCC can afford in implementing the plan.

I made many of these same points in discussing NTIA's spectrum identification and reallocation plan in a November 2010 blog post titled "Calling for Speedy and Purposeful Action on the Spectrum Plan." As I wrote in my prior post, "[i]t is critical that federal agencies — and NTIA and the FCC, in particular — act with seriousness of purpose and speed in reallocating and auctioning new spectrum for commercial use."

At the same time, I also observed that NTIA's initial "Fast Track Evaluation" of spectrum left out the 1755-1780 MHz band. NTIA acknowledged that the 1755-1780 MHz band "is harmonized internationally for mobile operations, wireless equipment already exists, and the band provides signal characteristics advantageous to mobile operations," making it highly sought after by wireless carriers. But NTIA also insisted there was not enough time to complete its analysis and transition plans regarding that spectrum in time for its October 2010 report. This led me to insist that "NTIA must live up to its word in treating that slice of spectrum as a priority" and "demonstrate its seriousness of purpose by getting its "Fast Track Evaluation" of the 1755-1780 MHz band completed, and fast."

Now with the release of the Second Interim Progress Report, the good news is that positive steps have been taken. As described in this latest Report, this year NTIA established a priority ranking for evaluating particular spectrum bands. And the agency "commenced a detailed analysis of the 1755-1850 MHz band," which it now considers "the highest ranked priority band for repurposing."

NTIA identifies sixteen different federal agencies utilizing over 3,000 frequency assignments in the 1755-1850 MHz band for a variety of functions. Those agencies have submitted information to NTIA regarding timelines and costs for their respective relocation that would free up that spectrum for future commercial use. NTIA now promises a separate report in November summarizing its study of the band and making recommendations regarding the reallocation of the spectrum.

Interagency reviews delayed the initial release of NTIA's "Ten-Year Plan and Timetable." Hopefully, those agencies' respective cost and timeframe estimates will not be unreasonable and will allow NTIA, for its part, to act expeditiously in preparing the 1755-1850 MHz band for commercial use. Persistence is imperative every step of the way.

Among other things, the Second Interim Progress Report points out that in June an advisory group to NTIA recommended consideration of the 5350-5470 MHz band for expanding unlicensed Wi-Fi access. As NTIA explains, "[u]nlicensed Wi-Fi has become a significant component of commercial wireless services by allowing the offloading of data, thus saving capacity on commercial wireless network[s]." Obviously, auctioning is not required in reallocating spectrum for unlicensed use. But preparatory work would nonetheless be required. According to the Report, to ensure compliance with existing spectrum use rules and to protect co-channel and adjacent use, "NTIA, FCC, federal agencies, and industry would need to determine the feasibility of expanding" unlicensed Wi-Fi into the 5350-5470 MHz band.

NTIA doesn't specifically identify agency or interagency action on the 5350-5470 MHz band in the Second Interim Progress Report's table of planned and ongoing actions. One must hope, however, that that work is already underway. Given the current state of technology, it is generally preferable to license and auction spectrum to better ensure such spectrum is put to its best and highest use. However, the unique characteristics of certain bands can make unlicensed spectrum a helpful compliment to existing wireless services using existing licensed spectrum. Making more unlicensed spectrum available for Wi-Fi access to help relieve network congestion and improve capacity is an excellent idea and must be pursued for feasibility.

A vibrant 4G wireless future depends upon the availability of more spectrum to handle the growing demands of wireless consumers. Once again, when it comes to identifying and reallocating additional spectrum for commercial use, NTIA, the FCC, and all federal agencies involved must act with a renewed sense of urgency and purpose in implementing the spectrum "Plan and Timetable." Leading the way, NTIA must continue to act promptly in reallocating the 1755-1850 MHz band and other spectrum bands for licensed commercial use. And all agencies involved should likewise act with speed in examining and potentially reallocating the 5350-5470 MHz band for unlicensed Wi-Fi use.

New Wireless Industry Alert Standards Stave Off FCC "Bill Shock" Regulation

On October 17 the wireless industry and the FCC jointly announced that most wireless carriers will begin sending free alerts to consumers to help them avoid overage charges. As a result, the FCC will hold off from imposing proposed wireless "bill shock" regulations—at least for now.

This is a positive outcome, all things considered. Wireless has thrived in a light-touch regulatory environment established in the 1990s. New "bill shock" regulation, however, risked saddling wireless services with unnecessary regulatory controls and—more importantly—would have provided a precedent for the FCC to regulate other facets of wireless service. To the extent wireless carriers can keep wireless free from new and unnecessary regulatory controls by placating the FCC through industry-wide self-policing, so much the better. Marketplace freedom is the environment most conducive to continued wireless investment, innovation, and competition.

The "Wireless Consumer Usage Notification Guidelines" constitute an industry-wide, voluntary plan for carriers to provide a slate of automatic overage alerts to wireless consumers who near and exceed their monthly plans' allowance for voice, video, or data services. The Guidelines will be incorporated into CTIA's "Consumer Code for Wireless Service" that provides disclosures and practices for wireless service to consumers. Implementation of the Guidelines by wireless carriers will take place between now and April 2013.

Most wireless carriers already provide a set of optional alert tools that consumers can use to monitor and receive updates regarding their monthly usage levels. So the Guidelines will result in a supplemental and more standardized set of opt-out alerts.

On their own terms, voluntarily-adopted industry standards regarding consumer overage alert messaging are a reasonable and commendable thing. However, "voluntary" takes on a qualified meaning when industry self-policing takes place in the shadow of looming agency rulemaking. In this instance, the standards adopted by the wireless industry are made in direct response to the FCC leveraging its consumer protection power to prompt the industry into action. As Amy Schatz reports in the Wall Street Journal, "[a]n FCC official said the agency would keep that rule-making process open in case any wireless carriers don't adopt the new industry standards."

Now, it's not unheard of for an agency to demand that an industry self-regulate or face government regulation. But the premises of the FCC's proposed "bill shock" regulations render the agency's leveraging of its consumer protection regulatory powers at least slightly less reasonable and commendable in this instance.
In November 2010 FSF Perspectives paper and in an April blog post, I described some dubious aspects of proposals for FCC "bill shock" regulation. Among other things, I suggested:

• There isn't a clearly established "bill shock" problem requiring FCC regulation;

• The FCC's proposed regulations exceed normal consumer protection concerns about fraud or unfair and deceptive trade practices since the overage charges are triggered by consumers using more services than they signed up for and such charges are part of their service contract terms;

• Aspects of the FCC's proposed regulations involving non-overage alerts and alerts regarding pre-paid service extending even beyond alleged "bill shock" problems would instead codify the FCC's second-guessing of business decisions and responsible and optimum usage by consumers; and

• Certain regulatory proposals advocated in public comments posed First Amendment problems by dictating certain mandatory icons and messages to be included in usage alerts and billing.

When the existence of an actual problem is in doubt and when the proposed regulatory measure extends beyond the scope of the alleged problem, an agency's leveraging of its regulatory powers over an industry to induce it to self-regulate approaches unseemliness. The better approach is for an agency to first clearly establish an existing consumer harm or problem, ascertain whether regulation is necessary to address the matter, and then target any needed regulation directly to the harm or problem.

Here, the wireless industry's voluntary adoption of usage alert messaging standards doesn't prove there is a real "bill shock" problem—let alone a problem commensurate with the scope of regulations initially proposed by the FCC. What it does prove is that the FCC wanted either new regulations or at least some changes in the industry's usual course of business dealings. The wireless industry took the FCC up on the latter course, understandably.

The end result is a net positive: wireless carriers will be providing extra reminders to consumers who approach or surpass their respective plan's voice, video, or data service usage levels, and doing so free from any new FCC rules. But given the problems besetting the FCC's proposed "bill shock" regulations that induced the new voluntary industry standards, the process leading up to this result isn't a model of agency action worth trumpeting. So the joint announcement by CTIA and the FCC deserves approval, but with an asterisk.

Another Bill to Bog Down 4G Wireless With Regulatory Burdens

On October 12, TR Daily's Paul Kirby reported on the introduction of a new wireless regulation bill in the U.S. Senate. S.1695, the "Next Generation Wireless Disclosure Act," is the companion bill to H.R. 2281. The House bill was subjected to critical examination in my June 29 blog post "In Congress, More Spectrum and Less Regulation is Key to 4G." Those criticisms apply with equal force to the Senate bill.

Both bills would burden one of our economy's best growth-engines with unnecessary regulations in a time when our economy needs all of the job-creating investments it can get. Congress should instead take immediate and decisive action to make new spectrum available for commercial use, and do so on flexible terms that would for enable continued innovation and investment in the wireless marketplace. As I described in more detail in my blog post from August 30, "More Spectrum Will Make 4G an Economic Force Multiplier."

Voluntary "Bill Shock" Agreement

The FCC, CTIA, and Consumers Union yesterday jointly announced a plan whereby the wireless providers will provide their customers with notifications when they are about to incur extra charges for exceeding the monthly allowances.


Here is my reaction which appeared in the trade press:


"The voluntary plan by industry to offer free consumer alerts is preferable to the FCC going ahead with its rulemaking proceeding. It is in the nature of FCC's rulemakings that they often result in over-inclusive and unnecessarily costly regulations.  So if this voluntary plan - and I use 'voluntary' advisedly - avoids that result, it is preferable to the alternative."


And here is FCC Chairman Julius Genachowski's statement.

In Case You Missed It: The Quiet Demise of Cable A La Carte

With the flurry of FCC activities taking place since May—including ongoing USF reform efforts, the AT&T/T-Mobile merger review, the 706 Report, and the Fifteenth Wireless Competition Report—one might easily have missed the quiet and anticlimactic demise of the cable a la carte regulation-through-litigation in Brantley v. NBC Universal (2011). In June, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit dismissed a nationwide class action antitrust lawsuit that sought to override marketplace business practices regarding video programming distribution by obtaining a judicial order imposing a la carte mandates. The Court dismissed the lawsuit for failure to state a valid antitrust claim.

Some background on Brantley v. NBC Universal can be found in a 2007 blog post, "Classless Class Action Against Cable." In short, the litigation sought to prohibit video programmers and video programming distributors such as cable and DBS providers from only offering multi-channel bundles and instead require separate channels be offered for purchase on a stand-alone basis. Soon after it was filed, the lawsuit picked up an effective endorsement of the then-Chairman of the FCC. But the litigation ran into trouble in the district court, where the trial lawyers were unsuccessful in making their Sherman Act claims through three complaint filings. So they appealed to the Ninth Circuit, and lost again.

The Ninth Circuit's opinion in Brantley observed that "[a]lthough plaintiffs may be required to purchase bundles that include unwanted channels in lieu of purchasing individual cable channels, antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury to competition." For this proposition the Ninth Circuit relied on AT&T v. linkLine (2009) – a case I blogged about at the end of the Supreme Court's 2008-09 term.

The bundling of service offerings is a common feature of competitive markets, as discussed in an FSF Perspectives paper by Stan J. Leibowitz titled "Bundles of Joy: The Ubiquity and Efficiency of Bundles in New Technology Markets." Not to mention the First Amendment problems that plague cable a la carte regulatory schemes that FSF President Randolph J. May pointed out in "The Constitution, A La Carte."

Thankfully, the Ninth Circuit's ruling in Brantley put a baseless regulation-through-litigation claim to rest. But since the lawsuit commenced, a la carte mandates have been superseded by other regulatory threats to video marketplace freedom. The FCC's "AllVid" proposal and Comcast-NBCU merger order conditions regarding video navigation devices and online video content, for instance, foreshadow future regulatory actions regarding video services. So when it comes to the video market, proponents of pro-market policies still have their work cut out for them.

Communications Law and Policy in the Digital Age: The Next Five Years

While I certainly didn't agree with all that he did, readers of this space know that I have great respect for former FCC Chairman William Kennard, now the U.S. Ambassador to the European Union. Kennard was appointed FCC chair by President Clinton and served in that capacity from November 1997 – January 2001.

One of the FCC's most significant decisions under Bill Kennard's leadership was to resist pleas in the late '90s to regulate then-emerging cable broadband services like telephone common carriers. In 1999, Kennard declared: "So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

This was an important milestone in keeping broadband Internet services free from legacy common carrier regulation. The current FCC, under the leadership of FCC Chairman Julius Genachowski, unfortunately took a step backwards last December when it adopted net neutrality regulations governing broadband Internet providers. A backwards step that, unless reversed, thrusts Internet providers, at least somewhat, back into the morass of the "telephone world."

Before he left the agency, Chairman Kennard released a "Strategic Plan: A New FCC for the 21^st Century." Again, because I have often quoted from the plan, readers must know by heart the August 1999 document's first sentence: "In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation."

Bill Kennard had that right, and I often think about his strategic plan for transitioning within five years – that is, by 2004 -- to a vigorously competitive marketplace environment with a greatly reduced need for regulation. I have this vision in mind today as I think about the Free State Foundation's upcoming fifth anniversary celebration. For the theme of the event is: "Communications Law and Policy in the Digital Age: The Next Five Years."

The simple truth, in my view, is that the FCC has been much too slow to reduce outdated regulations. And, what's worse, it has gone merrily about adopting new ones – net neutrality mandates, for example – that are entirely unsuited to the digital age competitive environment.

Today, and especially with the economy in such difficult straits, the FCC's default position should be "no new regulations" without a compelling showing of existing market failure and consumer harm. In other words, the default position should be not to regulate absent a compelling showing of need. Too often today, the presumption is the other way around. In addition to net neutrality, the agency's proposed "bill shock" and All-Vid" rules come to mind as examples of costly new regulations that don't pass the compelling need test.

By suggesting a change in the FCC's pro-regulatory mindset – that is, a change in its default position – I don't mean to suggest there is not some important work for the agency to do. There is, and, if done properly, this work can make a contribution to the nation's economic recovery. Done improperly, vice versa.

Here is a short-hand version of a brief list of what I have in mind.

·      USF/ICC Reform: In the next few weeks, the FCC will consider reform of what FCC Chairman Julius Genachowski on October 6 called the "wasteful," "inefficient," and "unfair" Universal Service/Intercarrier Compensation regimes. Reform of these outdated legacy regimes, so that at least they would be meaningfully less wasteful, less inefficient, and less unfair than today, will require the agency to adopt a hard cap, without loopholes, for $4.5 billion per year for the high-cost subsidy fund, along with a transition plan to sunset the high-cost fund in, say, ten years. The need for further subsidies can be evaluated at that time. There is no justification, in light of the rapidly changing technological and marketplace environment, to adopt a brand new "universal service" regime, funded by America's consumers, with ongoing, interminable subsidies. And the Commission should ensure subsidies only go to support unserved areas.

·      Spectrum Policy: Most immediately, the spectrum ball is in Congress's court, and Congress should act promptly to grant the FCC authority to conduct incentive auctions as a means of getting underutilized spectrum into the hands of those who value it more highly. Obviously, the FCC will have an important role to play in implementing the auctions. In the past, imposed auction conditions that supposedly furthered one of another pet social policies. The FCC's 700 MHz auction, in which the agency under FCC Chairman Kevin Martin's leadership imposed a net neutrality condition, is a case study in how the FCC should not conduct an auction. For the benefit of both consumers and taxpayers, auctions should not be burdened with extraneous conditions.

·      Merger Reviews: I've written very often about the need for the FCC to reform its merger review process. The agency should focus only on alleged transaction-specific anticompetitive harms, rather than using the review process as an opportunity to impose far-afield conditions that should be considered, if at all, in a generic rulemaking. Over time, the Commission's merger reviews increasingly have come to resemble, as I put in several years ago, a "bizarre bazaar," at which special pleaders, competitors and others, beseech the agency to impose conditions unrelated to any credible transaction-specific harms.

·      Internet Regulation: And, yes, if Congress or the courts do not overturn the Commission's net neutrality regulations, much will depend on the extent to which the agency implements them. Assuming the regulations remain on the books, it will be incumbent on the FCC to interpret and enforce them with sufficient flexibility and reasonableness that Internet providers retain incentives to invest in new facilities and continue to innovate.

As I said above, this is intended only to be a short-hand description of a short list of work confronting the Commission over the next months and years.

Well, to be candid, it is intended also as a bit of a teaser for the Free State Foundation's Fifth Anniversary Celebration Lunch this Wednesday, October 12, at the Mayflower. The event's theme is: "Communications Law and Policy in the Digital Age: The Next Five Years." We have a great line-up of speakers: Senator Jim DeMint, Ranking Member, Senate Subcommittee on Communications, Technology, and the Internet; Rep. Marsha Blackburn, Vice-Chair, House Energy and Commerce Committee's Subcommittee on Commerce, Manufacturing, and Trade; and Rep. Cliff Stearns, Chairman, House Commerce Committee's Subcommittee on Oversight and Investigations. Each of these members of Congress is an acknowledged leader on communications policy and regulation. Also, five members of FSF's distinguished Board of Academic Advisors – Michelle Connolly, Ellen Goodman, Daniel Lyons, Steven Wildman, and Christopher Yoo – will offer their thoughts about the next five years, and probably the next five weeks as well.

I am very excited to hear what they all have to say, and I hope you are as well. If you haven't already registered, you may still do so by rsvp-ing to Kathee Baker at: kbaker@freestatefoundation.org. Space is limited, however, so please don't come without registering first.

Sign-in is at 10:45 AM.     

Super-Committee Sets Sights on Underutilized Government Spectrum

It's pretty rare these days for any bipartisan agreement on budget issues, but this letter from Senators Kerry and Toomey and Representatives Upton and Becerra is a hopeful sign. They are all members of the so-called Super-Committee, tasked with coming up with solutions to make a dent in our national debt.


The letter is short, so you can read it yourself. But, in essence, it urges President Obama "specifically, to make more efficient use of federal government spectrum and reallocate some of it for commercial broadband use.  In particular, we should put every effort into making available paired, internationally-harmonized spectrum below 3 GHz in sufficient block sizes to support mobile broadband services within the next 10 years."  


In truth, this should have been done by now. But better late than never. President Obama ought to get the government moving on this spectrum initiative that has bipartisan support. Reallocation of underutilized government spectrum would be good for the nation's economy in two macro ways: Private sector wireless broadband providers need the spectrum to be in a position to grow and offer innovative new services, and America's taxpayers would benefit from the reduction in the national debt attributable to the auction proceeds.  

Super Speedy DC Circuit

The DC Circuit's decision late this afternoon announcing it would take jurisdiction over the appeal of the FCC's net neutrality order is good news for net neutrality opponents -- like myself. Obviously, this doesn't necessarily mean that the court will vacate the FCC's order. But the court, having slapped down the agency only a year ago for exceeding its authority with respect to net neutrality, must have been especially eager to grab hold of this case.

I don't think the net neuters will be happy about this development.  

D.C. Circuit to Decide Fate of FCC's Net Neutrality Regulations, Again

News outlets are now reporting that lawsuits challenging the legality of the FCC's order imposing network neutrality regulations will go to the U.S. Court of Appeals for the District of Columbia Circuit. It was the D.C. Circuit that hammered the agency a year ago April in Comcast v. FCC (2010) in its prior attempt to impose net neutrality mandates. As I blogged in "Comcast v. FCC: A Game Changer For Net Neutrality Regulation," the D.C. Circuit thoroughly and forcefully repudiated the agency's alleged jurisdictional basis for imposing net neutrality mandates.

For starters, it is highly probable the D.C. Circuit will strike down the FCC's net neutrality regulations once again on jurisdictional grounds. FSF's public comments to the FCC in its Section 706 Inquiry, for instance, point out that Section 706 is a directive that the agency exercise regulatory forbearance and other means to accelerate deployment "by reducing barriers to infrastructure investment" – operative term being "reducing" – and not an independent grant of regulating authority, as the FCC has recently re-interpreted it.

There are equally strong reasons for regarding the FCC's net neutrality regulations as "contrary to constitutional right." Much of FSF's writings regarding net neutrality have concentrated on the significant First Amendment problems posed by such regulations.

With the FCC's net neutrality regulations only recently published in the Federal Register and going into effect on November 20, this D.C. Circuit sequel case could spell a short life for the FCC's new rules.

Issue Analysis Urges Reforms to Roll Back Regulation's Heavy, Hidden Tax

CEI has just released the latest in its Issue Analysis series that draws important parallels between runaway growth in federal spending and runaway growth in federal agency regulation. In "The Other National Debt Crisis: How and Why Congress Must Quatify Federal Regulation," CEI Vice President for Policy Wayne Crews takes the starting point that "[i]n order to restrain the impulse to regulate everything, Washington must measure regulation as it measures spending." This Issue Analysis provides an overview of the continuing staggering growth of federal regulations and the enormous compliance costs that those rules impose. (In an study from earlier this year, "Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State," Crews cited an estimate that 2008 regulatory compliance costs were more than $1.7 trillion). "Reforms must become a priority for the administration and Congress," writes Crews, "because no viable mechanism exists for measuring or disciplining regulation comparable to even the limited control applied to spending."

Here are some of the reforms recommended by Crews:

• The President should extend his January 2011 Executive Order to all regulations – not just ones described as "out-dated."
• The President should issue new executive orders lowering the threshold at which a rule qualifies as “economically significant” from $100 million in annual costs to perhaps $25 million annually in order to "increase the number of rules brought to public attention each year."
• Congress should require that "summary regulatory data— classified by type of regulation and by agency—be published in the annual federal budget, the Economic Report of the President, a stand-alone document, or some other accessible venue."
• Congress should establish an Office of Regulatory Analysis to examine and analyze rules in detail, similar to how Congressional Budget Office examines and analyzes fiscal and budgetary matters.
• Congress should enact the Regulations from the Executive In Need of Scrutiny (REINS) Act or similar legislation that make Congress directly accountable for "economically significant" regulations by requiring congressional approval of new rules.

CEI is at the forefront in fighting the runaway regulatory state on both the policy and legal fronts. So it's no surprise that this latest issue analysis is a worthy read on a timely topic deserving of much more attention. Particularly, in an economy so desperate for job growth, curbing the rising tide of federal regulation is as important as putting responsible limits on out-of-control federal spending. As Crews reminds us, "[r]egulation does not control itself, and agencies will not apply the brakes. We have to do it, through our elected representatives."

Supreme Court Sends Spurious Cell Phone Suits Packing

On October 3, the U.S. Supreme Court declined to review the Third Circuit's decision in Farina v. Nokia (2011). By denying to hear the case, the Supreme Court leaves standing the Third Circuit's rejection of various state law-based claims raised against wireless manufacturers and carriers. Farina v. Nokia is multi-state class action lawsuit based on allegations that wireless devices contain unsafe levels of radiation. The Third Circuit ruled that the FCC's regulations of radio frequency (RF) radiation levels in wireless devices preempt the state law claims. Those state claims conflict with the purposes of the FCC's regulations in ensuring an efficient nationwide wireless service subject to uniform standards and the agency's balancing of those concerns with public health and safety.

As I mentioned in a July blog post, the evidence continues to contradict the far-fetched claims of those who say that cell phones operating within the FCC's current RF standards are somehow unsafe. But as Farina v. Nokia reaffirms, the FCC is the proper place to bring those types of concerns, not state courts or city councils.

U.S. House to Take Action Against Discriminatory Wireless Taxes

CommDaily reports that the U.S. House of Representatives is expected to soon pass the Wireless Tax Fairness Act (HR-1002). This is encouraging news.

We have previously described the economic dislocations and consumer burdens as well as inequities resulting from heavy and often discriminatory taxation of wireless. As I mentioned in my blog post "Calling for a Moratorium on New Discriminatory Taxes," the legislation would impose a five-year moratorium on any new discriminatory taxes imposed on wireless services by state and local governments.

The House bill is sponsored by Rep. Zoe Lofgren. CommDaily also reports that a Senate Finance Committee hearing has been requested for its companion bill (S-543).

A Regulatory Time-Out

I love Sen. Susan Collins new bill that would that would impose a "regulatory time-out." The “time out” would be a year-long moratorium on “significant” rules, typically defined as those expected to cost $100 million annually. There are a lot of good regulatory reform proposals percolating in Congress.


You don't have to like all aspects of each one to appreciate the fact that there is a growing consensus -- even President Obama seems to want to be part of it, at least in theory -- that Congress should act to halt the  over-regulation that now is putting a damper on jobs and investment.  

New Supreme Court Term Holds Promise for Media Speech Equality

Today's abundance of media content choices and competing media outlets calls for equal treatment of all types of media speech under the First Amendment, which also means a more limited role for government regulation of media speech. Nevertheless, aspects of today's media marketplace are still subject to government speech restrictions based on decades-old assumptions about spectrum or other scarcities and their effects. Continued reliance on those old assumptions means that broadcast outlets as well as cable operators continue to receive a lesser degree of First Amendment protection than other types of media, while government assumes a larger degree of regulatory control than it ought.

Now with the opening today of the new term at the U.S. Supreme Court comes renewed optimism that those outdated assumptions will begin to be peeled away. In its new term, the Supreme Court will yet again be considering FCC v. Fox – the now famous "fleeting expletives" case. Last time around, the Court confined its ruling to Administrative Procedure Act (APA) issues raised by the litigation. This time, the Court is set to address First Amendment issues. In particular, FCC v. Fox II provides the Court the perfect opportunity to finally jettison the old spectrum scarcity doctrine and thereby end broadcast media's unequal First Amendment treatment.

The Supreme Court firmly enshrined the so-called "scarcity doctrine" into its jurisprudence in Red Lion Broadcasting Co. v. FCC (1969), and further expounded on it in FCC v. Pacifica (1978). The doctrine supplies the rationale for subjecting broadcast media to a lesser degree of protection, as broadcast media regulations are subjected only to intermediate-level scrutiny by courts instead of strict scrutiny.

The scarcity doctrine received its most recent judicial sanction from the U.S. Court of Appeals for the Third Circuit in its July 7 ruling in Prometheus v. FCC (2011). In Prometheus, the Third Circuit ruled that the FCC's 2008 order changing its newspaper/broadcast cross ownership rule failed to satisfy notice and comment requirements of the APA. But it upheld most other media cross-ownership rule changes adopted in the FCC's order. In regard to First Amendment questions raised by the FCC's media ownership rules, the Third Circuit's rationale for upholding government regulation of media that uses or involves electromagnetic spectrum rested squarely on the scarcity doctrine. In the Third Circuit's words, the scarcity doctrine "establishes that '[i]n light of [their] physical scarcity, Government allocation and regulation of broadcast frequencies are essential…'"

Consider also the following pronouncement by the Third Circuit in Prometheus: "The Supreme Court's justification for the scarcity doctrine remains as true today as it was in 2004 — indeed, in 1975 — 'many more people would like to access the [broadcast spectrum] than can be accommodated.'"

In reaching its decision, the Third Circuit's characterization of the scarcity doctrine's validity was certainly unnecessary. It is also entirely unconvincing. Whatever validity the factual assumptions supporting the doctrine may have once held, they have long since evaporated. In Prometheus, the Third Circuit compared the amount of spectrum to persons who it claims want broadcasting licenses. But if one compares that supposed scarcity with media channel substitutes now available, one should conclude that abundance exists, not scarcity.

The U.S. Court of Appeals for the Second Circuit seemed to get this point in its remand consideration of Fox v. FCC. The Second Circuit considered itself bound to follow Red Lion and Pacifica until the Supreme Court changes the law. It ultimately decided the First Amendment questions at issue on vagueness grounds, rather than scarcity doctrine. Nonetheless, the Second Circuit saw fit to observe:

The past thirty years has seen an explosion of media sources, and broadcast television has become only one voice in the chorus. Cable television is almost as pervasive as broadcast – almost 87 percent of households subscribe to a cable or satellite service – and most viewers can alternate between broadcast and non-broadcast channels with a click of their remote control... The internet, too, has become omnipresent, offering access to everything from viral videos to feature films and, yes, even broadcast television programs… As the FCC itself acknowledges, "[c]hildren today live in a media environment that is dramatically different from the one in which their parents and grandparents grew up decades ago."...Moreover, technological changes have given parents the ability to decide which programs they will permit their children to watch.

A hint that the Supreme Court may take the Second Circuit's observations into consideration and throw out the scarcity doctrine was provided in Fox v. FCC I by Justice Clarence Thomas's concurrence. In that opinion, Justice Thomas insisted that "[t]he extant facts that drove this Court to subject broadcasters to unique disfavor under the First Amendment simply do not exist today," citing, among others, FSF President Randolph May's 2009 Charleston Law Review article, "Charting a New Constitutional Jurisprudence for the Digital Age."

Given the extent of video competition provided by cable and DBS and the myriad of news outlets now provided through such video services, the Internet, and other alternatives – the Supreme Court should replace the scarcity doctrine with a media abundance doctrine and thereby subject media regulation to the same First Amendment standards that it subjects other restrictions on free speech.

And in a future case, the next step for the Supreme Court would be to revisit and revoke the so-called cable "bottleneck" rationale, thereby eliminating cable's unequal treatment under the First Amendment. As I've explained in blog posts from May and July, and on several prior occasions, subjecting cable providers in today's competitive media market to intermediate-level scrutiny because of early and mid-1990s perceptions about cable bottlenecks makes no sense from a factual or First Amendment standpoint.

At the outset of the Supreme Court's 2011-2012 term, here's hoping that Fox v. FCC II will mark the beginning of a constitutional reckoning for free speech in the digital age.